“This post may contain affiliate links. Please read my disclosure for more info.
Think about the last few money emergencies you’ve had. Was it a car repair, home repair, a medical expense or an unexpected bill maybe?
Mine were two car repairs and an unexpected bill, all totaling around $3000, and all happening within about two months.
Now, how did you pay for yours?
If it came from your checking account, causing you to juggle other expenses around, I can imagine the headache. Being late on other bills affects your credit rating. Or if you had to have a temporary spending freeze, then life probably sucked for awhile.
Or even worse, is if you had to borrow the money from someone or charge it on a credit card. That kind of gut punch is what traps us in paycheck to paycheck mode. Because now you’re stuck paying it back.
We hear all the time that having an emergency fund is critical, and a CNBC poll found that 57 million Americans have NO emergency fund. And if they were hit with a $1000 emergency, they couldn’t pay for it.
One of the main reasons – possibly the main reason people never escape living paycheck to paycheck is that they can’t maintain a budget because they’re unprepared for emergencies.
But there is a way to start an emergency fund… even if you’re struggling now and living paycheck to paycheck.
What’s an Emergency Fund?
An emergency fund is a stash of money that you keep for unavoidable, but necessary expenses that come up unexpectedly. They’re expenses that you don’t plan for, so they’re not in your budget. It’s not money you’d use for a new TV or a concert, but only for true emergencies. Things that interfere with your everyday life and need to be fixed immediately.
Why do you need an Emergency Fund?
You need to start an emergency fund to protect your budget. A monthly budget enables you to plan your regular expenses, compared to your income. But those are your predictable expenses. You can also budget an amount that you’ll probably spend on something. But it’s impossible to factor emergencies into your budget, because by nature, an emergency is neither regular or predictable. And they’re usually expensive.
Trying to keep a buffer in your checking account isn’t the way to plan for emergencies because you’re always playing a guessing game. If you don’t have enough of a buffer, an emergency can destroy your budget. And if you keep more than enough, then that money could have been put to better use somewhere else.
What Qualifies as an Emergency?
If you haven’t encountered any of these typical emergencies recently, you probably will:
- Car repairs – Always when we least expect it.
- An appliance breaks down – If any of your appliances are 10 years or older, they’re on borrowed time. And for most of them, you’ll want to replace it right away.
- An emergency home repair – Things like termite damage, leaking pipes or an electrical issue, are all issues you’d want to resolve right away.
- A job loss – no matter how secure you think your job is, a change in management can mean the elimination of your job. It happens every day. It could easily take months to get another job, and it’s possible you’d be working for less salary.
- Medical bills, or a large copay – Medical or dental issues are expenses we can’t put off. Credit cards like Care Credit can stretch your payment out for years, at a high interest rate. And you’ll definitely encounter other emergencies before this one’s paid off.
- Emergency travel – A death or sickness in the family can mean travel expenses we didn’t budget for.
Have any of those happened to you recently? When they did, were you able to pay cash for them?
The most common reasons for not having an emergency fund:
- I can’t start an emergency fund because we’re living paycheck to paycheck.
- I can’t start an emergency fund because we’re paying off too much debt right now.
- I don’t have the time to open an account and make regular deposits.
Let’s take each of these one by one.
1. “I can’t start an emergency fund because we’re living paycheck to paycheck.“
You might not have the money to start an emergency fund because you can’t maintain a predictable budget. A budget should consist of expenses we know we’ll incur each month. We plan for them. You can’t possibly predict an $800 car repair bill. So if you’re paying for things like that out of your monthly budget, you’ll always be playing catch up.
Taking a look at your habits can uncover money you might be wasting. For us, it was weekends. We’d use the excuse of getting out of the house to go to the mall each weekend, and spend money we didn’t have. For you, it might be cable TV, buying groceries without any plan, an expensive cell phone plan, or some other expensive habit.
2. “I can’t start an emergency fund because we’re paying off too much debt right now.”
Paying off debt as quickly as possible is a good idea. In fact, some people consider credit card debt to be an ’emergency’. But consider this – if you’re making more than the minimum payments and you have no emergency fund, then what will you do when the next emergency hits? Probably add to your debt by charging it.
With debt payments and no emergency fund, your best bet is to make minimum payments on your debt just until you can accumulate $1000 in your emergency fund. Once you do, you’ll be prepared for that car repair or medical expense. Then you’ll be better prepared to throw every cent you can at reducing debt. And eventually, increase your emergency fund.
If you’re making minimum payments on your debt and still can’t afford even $25 per week for your emergency fund, you have two options:
Lower Your Expenses – Examine your budget closely. Go over every regular expense, looking for cheaper options, or even eliminate some expenses that aren’t absolutely necessary. It may require some minor lifestyle changes. Here are a few ideas you may want to try:
- 12 Keys to Drastically Reduce Your Grocery Budget
- How We Save $115 a Month by Cutting Cable – and Still Watch the Same Shows
- 7 Simple Tasks That Saved Me Over $4000 This Year
Increase Your Income – The object here, isn’t to increase your income to pay for your next vacation. It’s to bring in enough money to get at least $1000 in your emergency fund. I’d continue to make minimum payments on your debt while you build your emergency fund to $1000. Then, once you have $1000 in your fund, then you can use the extra income to eliminate debt.
Since most emergencies are probably less than $1000, building that amount initially, will help to plug the leak. But normalizing debt payments, and assuming you have decades to pay it off is one of the worst money decisions (or non-decisions) you can make.
Now, how do we increase income? The first place to look might be your own job, to see if there are any opportunities for another position, or some overtime. If that’s not possible, there are plenty of ways to bring in a side income that don’t require a lot of experience, and can be done from home. Here are some ideas:
- 21 Online Jobs for Students – Earn an Income and Still Have Time to Study
- 25 Ways to Make Extra Money This Month
- How to Start Your Own Money Making Blog
3. “I don’t have the time to open an account and make regular deposits.”
You can open an account online in about 10 minutes. You can also setup an automatic deposit into the account if you think you won’t remember to make regular deposits. Read on to see how I was able to automate my own account.
How About You?
If you’ve always felt that you couldn’t start an emergency fund, is it due to any of the 3 reasons above?
Thinking you can’t afford to start an emergency fund is one of the main reasons 78% of people live paycheck to paycheck their entire life. You can’t afford not to have an emergency fund.
Even if you’re still paying off debt, making a few lifestyle changes that’ll enable you to direct some money into an emergency fund will help eliminate debt quicker by not adding to it.
Types of Emergency Funds
One thing that intimidates some people when they think of an emergency fund, is the recommendation that you have 3 to 6 months of expenses in it. Or that you need some kind of an emergency fund calculator.
Sure, 3 to 6 months of expenses is something to shoot for, but if you have no emergency fund now, then just shooting for $1000 will help you to dig out of paycheck to paycheck mode. Then you’ll be in a position to add to your fund.
Some people like to maintain two types of emergency funds. A short-term fund, where you keep around $1000 in an easily accessible savings account, and a longer term fund, where you’d keep several months of expenses in an account that earns a bit of interest.
In my case, I procrastinated for years about starting an emergency fund, for the same reasons above. I almost always had debt payments, so I never seemed to have the extra money to deposit. And even if I did, I probably wouldn’t have remembered to make a regular deposit.
How to Start an Emergency Fund if You’re Living Paycheck to Paycheck
If you’re starting from scratch, the best way to build your emergency fund is a two-pronged approach:
- You want to quickly accumulate about $1000. This will pay for most emergencies, and prevent you from putting your next emergency on a credit card.
- Once you accumulate $1000, you’ll want to slowly build your fund up to around 6 months of expenses.
Here’s how I’d go about it:
To build your first $1000
An easy way to drip money into your emergency fund, is to automate it so it’ll happen every few days, but in amounts small enough that it won’t interfere with your bill paying.
The smartphone app, Digit, will do just that.
- It connects to your checking account and transfers small, affordable amounts every few days into your own FDIC insured savings account (which it opens for you).
- It takes a to-do item off your list. Every single morning, Digit texts me my checking balance and notifies me how much it’s changed from yesterday. I can reply, asking for the specific transactions, I can put my deposits on hold, I can transfer money back to checking, all with a simple text.
- It helps to eliminate debt, because you won’t be adding to it when your next emergency hits.
Digit will accumulate several hundred dollars pretty quickly. I was able to save $1000 within a few months.
Digit is free for the first 100 days, then it’ll charge you $2.99 per month. Now normally, I’m skeptical about adding another monthly expense. But for literally the price of one coffee each month, I’ve been able to pay cash for three car repairs, and two other unexpected expenses.
It’s really simple to use, and probably the most useful app I have. Here’s my full review if you want some more detail.
To Go Beyond $1000 and Save Six Months of Expenses
Once you’ve set aside $1000, you should be ready for most emergencies, but you don’t want to stop there. You never know when something major will happen, like losing your job.
To build your account to six months, you’ll want an account that’s liquid, so you can access it quickly. But most local banks pay a ridiculously low rate to hold your money.
I’ve opened an account at CIT Bank and chose their Premier High Yield Savings account. Right now, it earns 1.55% in interest. There are no maintenance fees, and it’s simple to check your balance or make deposits via the mobile app.
To select their High Yield Savings you need at least $100 as your initial deposit.
It’s easy to think that being ‘financially successful’ means earning a high salary. But that’s not the case at all. You can have a high salary and still live paycheck to paycheck.
Success is in the daily habits you develop that point you in the direction of your choice.
An athlete isn’t successful because he or she competes in the Olympics, or the NBA Finals. They become successful during the years of small decisions they’ve made along the way. They decide to get up earlier, eat healthier, or spend time practicing rather than watching TV.
You can make a small decision today, to devote even a few bucks a week to your emergency fund. And in a month or two, when the next emergency inevitably hits, look what’ll happen – your budget won’t skip a beat, and you won’t add another dime to your debt.
Using a budget is considered to be personal finance 101, but unless you can make your budget predictable, it’s not gonna work. Starting and maintaining an emergency fund is the key to making your budget predictable.
How about you? Do you have an emergency fund that works well? Or have you had trouble getting an emergency fund started?